CITY FOCUS: Dubai is lashed by a sea of red

So Dubai's shiny image of wealth and opportunity was really just a mirage. Investors and lenders to the upstart fishing town are still busy trying to get some clarity on what this will mean for them when the dust settles.

They got some answers on Monday night. The emirate's flagship corporation Dubai World, which is being suffocated by $59billion of debts, said it would restructure $26billion of these borrowings held by its two main property development companies - Nakheel World and Limitless World.

Dubai World, which owns ports group P&O, sounded the alarm last week when the emirate asked for a creditor standstill on the group's debts for some much- needed breathing space to sort out its finances.

Sell-off: The emirate's debt woes have triggered turmoil on stock exchanges in the Arab world

The city state, part of the sevenstate United Arab Emirates federation, is the sole owner of Dubai World. But astonishingly, it abandoned the business this week, saying it will not guarantee its debts.

The debt default sent global stock markets into a spin at the end of last week, and sparked a massive sell-off on local Arab exchanges this week. They took a further pounding yesterday as Dubai shares fell 3.6 per cent, Abu Dhabi plunged 5.6 per cent and Qatar was 8 per cent lower.

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Al Maktoum also criticised the negative media coverage generated by the default, fuming: 'This exaggerated media uproar will not affect our determination. It is only natural we should oppose this campaign and this huge media uproar.'

Meanwhile, the emirate's most valuable company has called in restructuring experts from accountants Deloitte, and has been forced to concede it would look at all options for cutting its enormous borrowings, including asset sales.

The statement has effectively hoisted a 'for sale' sign over the property assets and investments held by Nakheel and Limitless, as the group struggles to raise cash to pay back those it owes.

Dubai is in hock to hundreds of banks and investors who helped fund an $80billion makeover that transformed the former sleepy fishing town into a mecca for investment and tourism.

Nakheel had projects worth around $110billion at the end of 2008, while Limitless had developments worth $100billion.

These include Nakheel's extravagant Palm Trilogy of islands - which can be seen from space - and The World developments. Nakheel Hotels also owns the Metropole and adjoining 10 Whitehall Place in London, which could come up for grabs.

Dubai World, meanwhile, is the proprietor of the new W Hotel in Washington DC and the Turnberry golf resort in Scotland, but it is not known whether these will be included in the clearout.

Any firesale of assets would be unlikely to achieve the best prices. Dubai World has already been stung by London's fickle property market after selling two buildings on Regent Street and another on Oxford Street in November to Great Portland Estates for just £10m, after splashing out around £80million two years earlier.

For now, Dubai World's non-property related subsidiaries are safe, and will not be touched in the restructuring. These include investment arm Istithmar, owner of stakes in Standard Chartered and MGM Mirage, and its Ports & Free Zone World, which includes ferry giant P&O.

While Arab share exchanges remained jittery, European markets were stable as investors were reassured that Dubai's woes would have little direct impact on major banks.

Credit agency Fitch helped generate a more upbeat mood after saying the ratings of major UK banks - including HSBC, Royal Bank of Scotland, Lloyds Banking Group, Barclays and Standard Chartered - are not expected to be affected by their exposure to the Middle East.

It noted HSBC and Standard Chartered are most active there and so would be most exposed to any economic fallout in the region.

Fitch said HSBC has $48billion of Middle East assets, with around $25billion customer loans. Of these, $16billion are in the UAE and $2.9billion are property related, of which $1.8billion are in the UAE.

Standard Chartered has a proportionately higher exposure, but it does not publicly disclose its exposure. Morgan Stanley estimates it has $8billion of loans in the UAE.

Banks and other creditors are hoping that when the storm clears there will be something substantial left standing. Otherwise, they face having to shoulder a hefty bill for their investment in this desert folly.